Fed keeps eye on New Zealand

WASHINGTON — Unless you planned a vacation to New Zealand, you probably don't care that its central bank raised its lending rate to a record high this month.

Kevin G. Hall

WASHINGTON — Unless you planned a vacation to New Zealand, you probably don't care that its central bank raised its lending rate to a record high this month.

But U.S. Federal Reserve Chairman Ben Bernanke does care, and his concern is likely to arise when the Fed's policy-making body begins a two-day meeting on Wednesday.

New Zealand raised its rate to 8 percent because the global economy, enjoying the longest streak of above-average growth in more than three decades, is so hot that it's sparking inflation, or rising general prices.

Higher interest rates douse inflation, but slow an economy. If the Fed is forced to raise rates here later this year just as New Zealand has, that would slow the U.S. economy, too.

Bernanke and the Fed are watching New Zealand's central bank because global inflation can pass to the U.S. economy through import prices. Already the European Central Bank has raised its benchmark lending rate to a six-year high. And Chinese banking authorities are warning that they may raise rates to cool China's overheated stock market. That would raise the cost of making Chinese goods and the cost of importing them.

"Pass-through Now Key Question," said a June 22 research report by global banking giant Goldman Sachs & Co. Its researchers concluded that, for now, lower prices of European imports are offsetting higher prices in China.

But the uncertain global inflationary backdrop will highlight the Fed's decisions the next two days. Fed members already have telegraphed that their benchmark short-term interest rate — the federal funds rate for overnight bank loans — will stay where it's been for a year, at 5.25 percent.

But while there's little drama about this week's Fed's rate target, there could be soon, for storm clouds are gathering over the economic horizon abroad and at home.

Data released Monday by the National Association of Realtors showed sales of existing homes fell in May to the lowest level in four years. Median home prices have fallen for 10 consecutive months. On Tuesday, the Commerce Department reported new-home sales in May were off 15.8 percent from May 2006.

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